Company Perspectives:

IRSA is the best vehicle to access the Argentine real estate market. Its solid and diversified portfolio of properties has established the Company as the leader in the sector in which it participates. The Company's capacity and the strength of its management is reflected by its ability to take advantage of opportunities and maximize the Company's value and return for its shareholders.

Key Dates:

1991:

Eduardo Elsztein and Marcelo Mindlin purchase IRSA for $120,000.

1994:

IRSA buys three large Buenos Aires office buildings for $61 million.

1996:

The company begins acquiring shopping centers and developing apartment complexes.

The company has sold all its non-Argentinian holdings to refinance its debts.

2003:

IRSA records a profit again as Argentina's battered economy improves.

Company History:

In the space of less than a decade--the 1990s--IRSA Inversiones y Representaciones S.A. became the largest and most diversified real estate company in Argentina. Its principal activities consist of the acquisition, development, and operation of office, retail, and shopping center properties; the acquisition and development of residential properties; and the acquisition and operation of luxury hotels. IRSA's portfolio includes many of the most prestigious shopping centers, office towers, and luxury hotels in Buenos Aires. The company also acquires undeveloped land reserves for future developments or sale.

Buying Cheap and Selling Dear: 1991-96

Eduardo S. Elsztain, a college dropout, went to work in 1981 for the small real estate company established by his grandfather in Buenos Aires. The decade proved to be disastrous, with Argentina lurching from crisis to crisis and culminating in hyperinflation. The family-owned company went into bankruptcy, and Elsztain came to New York City in 1990. An Orthodox Jew, he spent his mornings seeking guidance from the Brooklyn-based Lubavitcher sect and his afternoons seeking to convince investors that Argentina, under its recently elected president, Carlos Menem, was about to embark on a new era. He talked his way into the office of George Soros, the fabulously wealthy Hungarian-American hedge fund operator, and persuaded Soros to give him $10 million to invest in beaten-down Argentine stocks. "George and I make a good combination," Elsztain later said, according to Jonathan Friedland of the Wall Street Journal. "He likes to take risks, while I believe a certain amount of fear is a precondition to any successful deal."

Argentina stopped inflation in its tracks by tying its currency to the dollar and stimulated foreign investment by privatizing state-owned enterprises. Back in Buenos Aires, Elsztain and his partner, Marcelo Mindlin, purchased IRSA Inversiones y Representaciones, a shell company--but one with a Buenos Aires stock exchange listing--for $120,000, and began assembling a portfolio of stocks. As the stock market soared in 1991 and 1992, Elsztain plowed his profits into the business he knew best, real estate, acquiring office buildings that, purchased cheaply, were yielding 18 to 20 percent a year in profit. Soros continued to provide capital and at one point owned almost half the shares. After IRSA entered the international equity markets in late 1994, raising $110 million, it bought three large office buildings in the heart of Buenos Aires for $61 million. These were landmark properties that the new owners carefully restored.

Also in 1994, IRSA began development of a shopping center in Abasto, a neglected but conveniently located Buenos Aires neighborhood. Before the end of the year the company had sold half of this enterprise to a Chilean firm for $11.5 million. The art-deco shell of the Abasto warehouse, formerly the site of the city's primary fresh produce market, subsequently became the facade of a structure housing a major retail commercial complex with 180 stores as well as movie theaters, a museum, and restaurants (including the only kosher McDonald's outside Israel). By late 1995 IRSA also had taken a stake in Brazilian and Venezuelan real estate ventures through IRSA International Ltd., a company registered in the British Virgin Islands. By late 1997 IRSA International also had holdings in Chile, and its investments in the three countries constituted one-quarter of IRSA's total portfolio.

In the wake of the Mexican peso devaluation of late 1994, foreign investment in Latin America slumped, and IRSA's net sales fell 40 percent in 1996 (the year ended June 30, 1996) from the previous year. The company reacted by halting development and property sales and acquiring existing buildings to increase its cash flow through rentals. It also used the crisis to buy back some of its bonds and stocks at significant discounts, thereby supporting its share price and reducing its outstanding debt. In addition, the company made money by purchasing Argentine government bonds cheaply, then selling them as the economy improved. IRSA's fast footwork enabled it to maintain its profit level despite the drop in sales. Twenty percent of its assets were in cash at the end of 1996, and much of this money was used to buy prime office properties cheaply during the next fiscal year, just before the Argentine economy recovered from Mexico's so-called "tequila effect."

During its first five years, IRSA had reinvested all its profits, but in 1996 it began returning a percentage of its rental income to shareholders in order to attract pension funds as investors. By the end of the year its 13 office buildings, renting to blue-chip tenants, had occupancy rates averaging 97 percent. The remaining 55 percent of the company's portfolio was divided evenly between retail and residential properties. The retail properties were concentrated in supermarkets and shopping centers as well as the Mercado de Abasto. Residential properties included the 312 hectare (771 acre) suburban Barrio Abril development that IRSA began organizing in 1995 in partnership with Alto Palermo S.A., the real estate subsidiary of the family-owned Perez Companc conglomerate. The planned development called for a private residential community with 1,320 house lots, sports facilities, shops, and a school.

Expansion, Then Retrenchment: 1997-2002

In 1997 IRSA paid $115.4 million for a 63 percent interest in Alto Palermo, whose holdings included a Buenos Aires shopping center by the same name. This acquisition brought the company's portfolio to one-third of all shopping center sales in Buenos Aires. Also that year, the company acquired the Llao-Llao luxury hotel near Bariloche in Argentina's alpine lake district and 51 percent of the Inter-Continental Hotel on the Buenos Aires riverfront. IRSA paid $13.3 million for Llao-Llao, which continued to be a white elephant often less than half-occupied.

By mid-1998 IRSA was managing assets valued at $1.2 billion and had taken in $453 million of capital between 1991 and 1997. Its shopping centers now included the prestigious downtown Galerias Pacifico, Patio Bullrich, and 51 percent of Buenos Aires Design, plus commercial centers in Rosario, Salta (80 percent), and Mendoza (25 percent). The Maple and Pirelli buildings had been added to its roster of Buenos Aires office towers. The company had paid $54.3 million for 71 hectares (175 acres) earmarked for residential development in the city's gritty La Boca neighborhood and had purchased two waterfront docks in the up-and-coming Puerto Madero area adjoining the business center, a project inspired by Battery Park City in downtown Manhattan. IRSA also had added another Buenos Aires hotel, the Libertador, giving it one-quarter of the five-star hotel rooms in the Argentine capital. (It subsequently sold a 20 percent share in the renamed Sheraton Libertador to an affiliate of Sheraton Hotels.)

Not all IRSA's tenants were enchanted with the company. The owner of one firm told Diego Ardiara of Mercado, "They seek a very high rate of return. They established as their objective a return of 17 percent, and that is expressed in the down payment and rents we have to pay. Our return from locations in the shopping centers is so low that sometimes it's necessary to attribute the investment to the advertising account, since it's no longer a question of making money but of marketing." Elzstain responded, "I'm not going to cry, especially for the worst businessmen in Buenos Aires." He added that a much higher rate of return was needed in Argentina than in a nation like the United States because of the much higher rate of risk. "When a tenant closes shop here, Argentine law doesn't impose a penalty after six months, while a North American contract obliges him to pay rent over the full period of the lease," he continued. "Besides, here the developer has to wait eight to ten years to recover his investment. ... There, six months after a complex is completed, he presents the contracts and recovers his money."

About this time Argentina began sinking into a new recession that would worsen until the government defaulted on its debts in early 2002. Meanwhile, Soros Fund Management LLC was cashing out its holdings, which by September 1999 had dropped to about 7 percent. Other shareholders expressed dissatisfaction with the 10 percent of after-tax profits that Elzstain, Mindlin, and other IRSA managers had been collecting in lieu of salary as compensation for running the company. Accordingly, in 1999 the four top executives agreed to accept salaries instead. In exchange for foregoing their management contract, however, they won the right to buy up to 20.9 million shares of the company for $1 apiece, a huge discount from the current price of $2.92 a share. "We like to see management incentivized by stock, especially in emerging markets," a Wall Street mutual fund manager told Craig Torres of the Wall Street Journal. "But this is a little excessive." Investors also were angered because Elsztain and his partners exercised an option to buy 20 percent of Alto Palermo from IRSA, then sold millions of these shares back to IRSA for a $4.8 million profit.

As the new millennium dawned, IRSA became ensnared in the ever worsening Argentine economy. Revenue fell in 2000, and the company suffered the first of three consecutive years of net losses. It sold its Venezuelan interests for $67 million, and its remaining half-share in Llao-Llao; the deal also included Galerias Pacifico. IRSA paid $50 million, however, for a 10 percent share of Corporación Financiera Hipotecaria, a new mortgage bank similar to Fannie Mae in the United States. This investment became a loser when Argentina's banking system collapsed under the weight of unpaid debt. Through Alto Palermo, the company launched a virtual shopping center named Altocity.com as a joint venture with Telefónica de Argentina S.A., offering an initial 150,000 products from 70 retailers in 12 categories. IRSA pledged to spend $36 million on developing and marketing the site in 2000 alone and expected sales through the web site to reach $100 million within four years. By the end of the year, however, Altocity was combined with other e-commerce ventures that IRSA controlled, and it was still in the red in 2003.

After the Argentine peso lost more than two-thirds of its value in 2002, IRSA's dollar-denominated debt rose proportionately. It sold its Brazil holdings--which had been accounting for nearly one-quarter of its sales--for $44.2 million and liquidated IRSA International. Fifty-four percent-owned Alto Palermo S.A. was consolidated into the parent company in that year as APSA. During 2003 IRSA converted most of its outstanding debt from short-term to long-term liabilities. Despite its setbacks, Mindlin said that as soon as the economy recovered, IRSA was ready to begin construction on new projects.

IRSA in 2003

IRSA, either directly or through subsidiaries and joint ventures, held significant interests in 59 properties in Argentina in 2003, mainly in Buenos Aires. Its net sales during the fiscal year came to ARS 212.94 million ($76.87 million), and its operating income to ARS 20.1 million ($7.26 million). Net income came to ARS 286.4 million ($103.39 million), mainly because of financial transactions such as the sale of the company's Brazilian interests. Of IRSA's net sales, its seven remaining shopping center properties (five in Buenos Aires) accounted for 53 percent. Residential properties accounted for 22 percent and luxury hotels for 16 percent. The 17 office and non-shopping-center properties--all in Buenos Aires--accounted for 8 percent. IRSA's real estate portfolio was valued at ARS 2.12 billion (about $757 million) at the end of March 2004, of which shopping centers accounted for 55 percent; land reserves, 21 percent; offices and others, 16 percent; hotels, 7 percent; and residential, 1 percent.

Among IRSA's office buildings in Buenos Aires was Inter-Continental Plaza, a 24-story structure next to the IRSA-owned hotel. Its shopping centers in the city included Alto Palermo, a 153-store complex opened in 1990; Paseo Alcorta, a 121-store complex opened in 1992; and Abasto Shopping, which opened in 1999 with 180 stores. Residential buildings included Torres de Abasto, a four-building high-rise complex completed in 1999; Palacio Alcorta, consisting of 191 residential lofts converted from a former Chrysler Corp. factory; and Alto Palermo Park and Alto Palermo Plaza, twin 34-story apartment buildings. Some 566 homes had been completed in Barrio Abril, and 92 percent of them had been sold. Another IRSA residential development, Villa Celena, on the southeast edge of Buenos Aires, was 99 percent sold.

Elsztain owned 25 percent of IRSA's common stock in late 2003. Templeton Investment Counsel owned 15 percent and various pension funds a combined 10 percent. Between late 2000 and the end of 2003 a sister company, Cresud S.A.C.I.F. y A., invested about ARS 133.6 million ($48.23 million) to purchase approximately 22.65 percent of IRSA's outstanding shares.